Wednesday, March 15, 2017

The Complacent Class by Tyler Cowen

I recently finished reading The Complacent Class by Tyler
Cowen. It’s an interesting book that covers a lot of ground, but one of the
things I found most interesting is a response to criticism of one of Cowen’s
previous books.

In The Great Stagnation, Cowen argues that income growth has
stagnated since about the 1970s, a claim that I (and I'm in good company here) find
pretty implausible. I the early half of the 20th century, we went
from indoor plumbing being a luxury to it being a necessity. We saw
automobiles, refrigerators, televisions, and other appliances completely
penetrate the market, approaching ownership by 100% of households in most
cases. We saw massive growth in the 3-4% per year range (as in, you could
expect your wage to grow at 3 or 4% per year on average over these decades). By some time
in the 70s, the story goes, the low-hanging fruit had been plucked at growth
slowed. It’s been at about 1-2% per year since. (Some even claim that wage growth
has stopped completely for the middle class, but I think this uses implausibly
pessimistic assumptions and ignores a lot of relevant facts.)

The response to Cowen’s stagnation argument is that official
income and growth statistics miss a lot of the picture. Official inflation
numbers overstate inflation, which has the effect of pushing up past wages when
we put them in current dollar terms. (If past wages are overstated, then total growth in wages is understated.) Technology improves the quality of various
products, so it’s hard to compare a “phone” from the 80s to a “phone” today (or
a TV or a washing machine or an automobile). Some products were not widely
available or didn’t even exist in the 80s. How do you measure “inflation” on
computers and cell phones (oops, I mean smart phones)? Houses have gotten
bigger, food at the grocery store comes in wider varieties, etc. Also, the internet.
Some of these new items dominate how we spend our leisure time. We literally
could not have purchased them in previous decades. In short, “stagnation my
butt.”

Cowen responds to this response by trying to measure the value
people objectively place on things like smartphones and the internet. He points
to studies of the elasticity of demand for internet service; when the price
goes up, people cancel their subscription. If these things were so valuable, you'd expect demand to be much less elastic than it apparently is. Presumably something similar happens
with smart phones. He also does a simple calculation to check the overall plausibility
of the “unmeasured growth” claims. He points out that if the pre-70s growth rates had continued, today’s median income would be in the $90,000/year range, as opposed to the
$50,000/year range we actually see. So are the anti-stagnationists actually
saying that we’re willing to pay $40,000/year for all these technological
improvements? (Smart phones, the internet, laptops, etc.) Admittedly this sounds
implausibly high. It’s hard to imagine someone literally forking over $40,000
for internet and a smart-phone plan.

My response is to say, “What was economic growth supposed to look like?” The early part of the century saw an enormous build-up of “stuff.”
Massive amounts of steel and copper and energy were required to make all those
cars and the plumbing infrastructure and the household appliances. Supposedly
continuing on the pre-70s trajectory would have made median household incomes
grow from $50k/year to $90k/year; let’s round up to $100k and call it a “doubling”
for shorthand. So, were we supposed to double the amount of steel and energy
and cloth we used? Were we supposed to have twice as many clothes and cars and
washing machines as we had in the 70s? Was the sheer tonnage supposed to have
doubled? Some anti-stagnationists (I’m thinking Matt Ridley’s book The Rational
Optimist, though I don’t have any one passage in mind) like to argue that
recent growth has been about doing more with less, not simply having more stuff.
We turn the same amount of cotton and wool into nicer clothes with fewer
manufacturing imperfections. We make a car of similar size and structural
integrity out of less steel; its lighter engine delivers more power using less
fuel. It’s not obvious to me how this would affect national income statistics.
If you make more cars out of the same amount of steel, does rising GDP totally
capture this? If those cars last twice as long as older 70s-era cars, they essentially
have double the value to their users. But they aren’t going to double in price,
because everyone else is selling cars like that now (price is a function of supply
as well as demand).

Cowen conjures the image of a median household earning $90k
a year deciding whether or not to fork over almost half of it for internet, a
smart phone and maybe a couple of other devices. We’re supposed to scoff at the
implausibility of it, but I think that’s more or less the decision American
consumers have made for themselves. It didn’t happen all at once, but
incrementally we scaled back parts of our economy as the internet and devices
have made leisure more readily available. People who partake of these new
options (which is most of us) spend a very large portion of their leisure time
on them. Many of these services are free, at least at the margin. I can use
Youtube, Instagram, Facebook, Twitter, and Google as much as I want without
incurring any extra charge beyond the monthly cable/internet bill. And I can
watch as many movies as I like on Netflix and similar services once the monthly
fee is paid. We are better connected to our fellow creatures, we have more
entertainment options than ever before, and we have all the knowledge of
humankind at our fingertips (if there’s an ungated link), mostly for free. It’s
misdirection to fixate on the amount of money spent on these services; these
are extremely important parts of our economy as measured by the time people
spend on them.

Contra Tyler Cowen, I think Mr. Ninety-K-a-year would soon
get bored of his pre-70s technology and shell out enormous sums trying to
replicate what we have today, and mostly failing to do so. If we managed to get
him a smart phone and a home internet connection, he’d scale back his work
hours and spend more of his time on leisure. “Pre-1970s work hours are for
chumps! I’m spending more time at home, and more ‘work’ hours screwing around
on the internet!” (Average annual hours worked fell by about 100 hours/year
since 1970, from ~1900/year to ~1800/year. I’m not sure Cowen addresses this rise in
leisure hours in his books, but it seems like an overlooked point. My apologies
if he did address it and I missed it.)

I can imagine some material innovations that would be
enormously enriching. Nuclear fusion, or something else that brought us nearly
unlimited cheap energy. Faster air travel, or automated cars, or modernized
computerized rail transport, would make it easier to visit people and places at
great distances more cheaply. Cowen discusses these potential improvements and
bemoans their failure to materialize. But a question interrupts this daydream: “To
what end?” Cheaper energy would be welcome in the third world, where lack of cheap energy is a real killer. But to the American middle class? Our biggest
household energy use is climate control. Is it that big a pain to throw on some
socks and a sweater if your house is inadequately heated? Or to remove layers
in the summer? Skype and Google Hangouts
aren’t perfect substitutes for a real-space visit, but couldn’t better virtual
reality eventually substitute for faster travel? It’s easier to move bits than
atoms across the globe. No doubt we’d find new uses for all that cheap energy.
I don’t want to suggest that it would simply lighten the load of our current
biggest energy hogs (climate control and transportation). But it’s hard to
imagine what “sustained growth” of the pre-1970s type looks like. Our demand
for sheer “tonnage of stuff” has been nearly satiated. We’ll probably keep
getting better and faster computers and devices. We’ll get better
communications technology and entertainment options. These changes will come
gradually and will not be reflected in national income statistics, but once
they happen nobody will seriously want to return to a previous decade’s technology.
Leisure will increasingly look more attractive than work at the margin (or
entirely for some people!). We’ll see
working hours for the median worker fall, and we’ll see a relatively few
mega-productive workers from the entrepreneur/hacker culture creating enormous
amounts of value, most of which doesn’t get captured in GDP (because much of it will be given to the consumer for free).

I’ve rambled on for two-and-a-half pages about a small piece of Cowen’s book, which is not really central to his overall thesis. Do read The
Complacent Class. There’s much in it I liked. I just don’t quite buy the notion
(what follows is my completely unfair summary of his thesis) that we should have
been taking big risks and living less comfortable, cozy lives in pursuit of
space travel and faster airplanes and flying cars. Read Arnold Kling’s review
here, my favorite so far.